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The Investment Performance of Housing and "Hedonic" Spatial Equilibrium

Tracey Seslen, William C. Wheaton, Henry O. Pollakowksi
This research unites the two major strands of work that exist to date in the literature on Housing Markets. The first is the notion of spatial equilibrium wherein consumers inhabiting different units are thought to be at a constant utility level. As a consequence prices "compensate" for differential "hedonic" housing attributes. The second is the application of life-cycle analysis to the determination of the "full" cost of owning housing as a financial asset. Linking the two we hypothesize that it is the "risk-adjusted annual cost of ownership" which should compensate owners for the differential consumption flows that come from various houses. To test whether this is the case we develop a unique data set for 4 US metropolitan areas that ascertains the appreciation and risk from owning housing at the ZIP code level. We then combine this with transaction based data on price levels - at the same level of geographic detail. We find that in ZIP codes with higher historic appreciation, price levels are indeed higher, but we suspect that this may represent misspecification through an identity. When we test over a shorter period for whether prices anticipate future appreciation - we get very mixed results. In nearly half of the specifications ex ante appreciation are insignificant or have the wrong sign. The results for risk are similarly disappointing. These results reinforce the doubts raised by others over whether the housing market is "efficiently" priced.